Cumulative Voting and the Protection of Minority Shareholders in the CIS

Cumulative Voting and the Protection of Minority Shareholders in the CIS In: Investor Protection in the CIS - Legal Reform and Voluntary Harmonization - Law in Eastern Europe, No. 57. Gregory Maassen and Rilka Dragneva.

The election of board members through cumulative voting is a mechanism that allows minority-shareholder representation on company boards in situations where “straight voting” would have made that impossible. Hailed by many as a principal guarantee for investor protection, cumulative voting was introduced in the United States during the late nineteenth century as an outgrowth of political reforms. Although popular at the beginning of the twentieth century, the usage of the system in corporations has steadily declined since the 1950s. By 1992, only six US states maintained mandatory cumulative voting; 43 states and the District of Columbia made it optional; while one state, Massachusetts, prohibited cumulative voting. Currently, most jurisdictions—both Anglo-Saxon and Continental European
countries—do not provide for mandatory cumulative voting.

In contrast to this trend, policy- and legal-reform advisers in the Commonwealth of Independent States (CIS) have argued not only for the introduction of cumulative voting for board members of joint-stock companies but also that it should be mandatory. The arguments put forward relate to the dire need to protect minority shareholders in the context of powerful managers and controlling shareholders, weak non-legal constraints to act as default disciplining forces, and weak institutional capacity for enforcement. As will be discussed further below, these recommendations have indeed been followed in a number of CIS countries. Furthermore, while the initial advice extended mandatory cumulative voting only to companies with a large number of shareholders, the trend of legal reform has been to introduce it for all (or a larger number of) companies.

While undoubtedly valuable as a mechanism for minority-shareholder protection, cumulative voting has also given rise to some important concerns that have been voiced in relation to corporate developments in the West as well as in some emerging markets. In this chapter, we ask whether the adoption of cumulative voting as a mandatory rule can really make a difference in terms of investor protection in the CIS. We begin by briefly reviewing the status of cumulative voting in CIS legislation. We then put forward a number of problematic issues related to cumulative voting and examine their manifestation in the CIS context. We conclude by calling for caution in the adoption of mandatory cumulative voting in Eastern Europe and draw attention to complementary legal and other socio-economic mechanisms that should be put in place to maximize the effect of this instrument.

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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.